Question

Explain two different institutions and/or policies that can affect the growth of real wages and the unemployment rate (ie. institutions and policies for increasing output and decreasing unemployment rate)

Answer 1

Two main policies that can affect or that can increase output and decrease unemployment rate are: expansionary fiscal policy and expansionary monetary policy.

We know that the government governs fiscal policies with its tools, government spending, and taxation. Here the government will use expansionary fiscal policy.  When the aim is to increase the output and decrease the unemployment rate in the economy, this policy is used. Under this, the government increases its spending and reduce tax rates. This leads to increase in the aggregate demand in the economy. Thus, different sectors of the economy get a boost, production level increases, the total output of the country increases and more people are employed in this expansion process which reduces unemployment.

The central bank of the country controls the monetary policy. Here the central bank will use expansionary monetary policy where it increases the money supply in the economy by lowering the interest rates. At lower interest rates, investments will increase, savings will decrease and consumption will increase. Greater investments will expand the production level of the country which will lead to greater output and lowering of unemployment (as more people will be employed in the expansion of the production process).